Sovereign debt rule changes threaten EU bank finances

June 9, 2016

Martin Arnold, Financial Times

European banks would have to raise up to €170bn of extra capital or sell almost €500bn of sovereign debt if regulators push ahead with plans to break the “doom loop” tying lenders to their governments, according to new research.

Expected changes to regulation could lead to a 30 per cent increase in capital requirements for the main EU banks, according to the research to be published on Wednesday by Fitch, the credit rating agency.

Since the 2011 European debt crisis laid bare the risks of banks holding large amounts of debt issued by their governments, top eurozone regulators have repeatedly warned of the need to break this link.

The European Commission and European Central Bank have both said that they are considering ways to introduce a capital charge for banks holding sovereign debt, which has been historically seen as risk-free.

The proposals are controversial, and some eurozone leaders, such as Italy’s Matteo Renzi, have warned that they would block any attempt to cap the amount of government debt that banks can hold. Read more